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Assessing the impact of green bonds
By the Nikko AM Green Bond Team
12 March 2024
The green bond market has experienced tremendous growth since 2007, but despite its rapid success, there are stillbarriers to overcome. In particular, assessing the impact of green bonds continues to be a contentious topic.
Due to a lack of standardisation among both issuers and regulators, gathering, grouping and communicating fundlevel impact data is challenging, as are efforts to ensure green bonds continue to represent the interests andrequirements of investors. Nonetheless, measuring the impact of green bonds is an essential component inensuring their continued success.

Which metrics matter most to green bond investors?
As one would expect given the increasing appetite to understand the real impact of investments, most green bondinvestors track alignment with the United Nations Sustainable Development Goals (SDGs). SDGs are a great basis
for mapping the use of proceeds to clear and understandable environmental and social outcomes.
Indeed, many of the most common metrics required by investors – including greenhouse gas reductions, CO2emissions avoided and carbon intensity—have become established components in impact reports from issuers.
Please see an Environmental Finance survey from 2022 in Charts 1 and 2.
Green, Social, Sustainability and Sustainability-Linked Bond Principles designed by the International Capital Market
Association (ICMA) have been widely accepted as the common framework to provide transparency on the issuanceof labelled bonds. All issuers aligned to ICMA Principles are committed to report on the allocation of proceeds, whichis generally accompanied by impact metrics.
While the ICMA Principles are a useful starting point to gather and compare how proceeds are being used by issuers,
and the impact they have, the principles themselves are broad and not prescriptive. This means that the reporting
quality and consistency between issuers can still vary widely. Some issuers will report their allocation on an
aggregated portfolio basis, rather than on a bond-by-bond basis. Others may not specify what proportion of a
specific project is financed by the green bond proceeds—making it almost impossible to measure bond-specificimpact.
In recognition of this, while adhering to ICMA Principles is a good starting point, investors seeking to meaningfully
understand the impact of green bonds and want to be able to compare and contrast between different green bonds,
continue to demand better quality impact reporting from bond issuers, and increasingly look to do so throughissuer engagement.

FOR SOPHISTICATED INVESTORS ONLYASSESSING THE IMPACT OF GREEN BONDS

Chart 1: What environmental metrics are your firm most interested in?

Source: Environmental Finance survey (2022)

Chart 2: What are your firm’s main criteria when choosing a green bond fund to invest in?

Source: Environmental Finance survey (2022)

Engagement throughout the lifecycle
The IIGCC Net Zero Bondholder Stewardship Guidance advocates a long-term financing lifecycle-based approach.
This presents a useful illustration on how engagement can support better impact measurement and reporting.
The lifecycle includes the following steps:••••

Pre-issuance engagement based on financed emissions, refinancing pipeline, and net zero alignment.
Issuer and issuance alignment of climate and net zero commitments, targets and covenants, andmonitoring this alignment over time.
Collaborative approach across the bond market ecosystem including issuers, investors, Debt CapitalMarkets (DCM) syndicate, banks, SPOs, rating agencies, index providers, regulators and policymakers.
Engagement progress and outcomes to clearly link stewardship to investment decisions, and steer
responsible capital allocation.

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ASSESSING THE IMPACT OF GREEN BONDS

Chart 3: Bond market ecosystem

Source: https://www.iigcc.org/resources/net-zero-bondholder-stewardship-guidance

Regulatory challenges

New 2023 requirements surrounding the introduction of the EU Taxonomy have imposed additional regulatory
responsibilities on fund managers. While initially focusing on climate environmental objectives, 2023 revisions haveincluded a wider set of sustainably-orientated economic activities, namely:••••

Sustainable use and protection of water and marine resources
Transition to a circular economy
Pollution prevention and control
Protection and restoration of biodiversity and ecosystems

Nikko AM’s perspective is that although the EU Taxonomy is helpful for determining whether an economic activity
can be considered environmentally sustainable, it is not the only approach and is less well adapted to companies
beyond the EU. The EU Taxonomy could be considered as sometimes too stringent in its quantitative demands,
given the availability and quality of data. Currently we do not use the EU Taxonomy to measure impact in our own
funds. That said, we do recognise it has value in terms of monitoring, as well as highlighting certain key elementsthat any sustainable investment process should possess.

What next for green bond fund impact reporting?

Although impact reporting among green bond issuers is improving, the quality and consistency of impact reporting
can still vary significantly. Without being properly addressed, this lack of standardisation on reporting could have
deeper consequences for the industry as a whole. The lack of consistent data is not only an issue for our own analysis
but also for our client’s reporting expectations. The less transparent an issuer is, the less likely the bond will beincluded in a sustainable fund. However, progress is being made, and the global significance of green bonds meansthat specialist data providers are increasingly looking to provide comparable impact data for analysis and reporting,using assumptions and methodology to understand impact.

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